Political tensions and their impact on the economy

Romania has seen record economic growth. At the same time, the inflation rate has gone up and the budget deficit appears to be more and more fragile.

Romania has seen record economic growth in recent years.

In the past few years Romania has seen record economic growth. Relying
on the positive figures that place Romania first among the EU countries in this
respect, figures that were also confirmed by international financial
institutions, the Government in Bucharest has this year increased spending
related to public sector salaries and has lowered a series of duties, such as
the income tax, which went down from 16% to 10%.

At the same time, however, the inflation rate has gone up and the budget
deficit appears to be more and more fragile. The European Commission has
already warned the Romanian authorities that the country's budget deficit is
getting close to the critical threshold of 3%. President Klaus Iohannis has
also said recently that budget revenues are in freefall and has blamed it on
the policy of the Social Democrat PM Viorica Dancila. In two weeks, President
Iohannis has twice called on Dancila to resign. Political tensions between the
Government and the President have escalated lately, with effects on the
economy.

Professor Mircea Cosea, an expert in economy, a cabinet member in the
1990s and one of the architects of the country's economic and political reform
after the fall of communism, explains:

"The problem is that we have created an environment in which the economy
cannot advance. On the contrary, in my opinion, it is going to face great
difficulties. This is because this political situation, which some call
instability and others a quarrel, a tiff, depending on how we interpret it, is,
after all, tinged with a certain sense of fear and unpredictability. There's a
certain feeling of uncertainty. Trust in the Romanian economic environment and
the so-called functional market economy is being lost because a well-known
scenario is being repeated over and over again in the run-up to election
campaigns. Romania's economy is always affected during election campaigns.
We're now facing three electoral events within a period of two years. In my
opinion, the electoral battle has started and is conducted in a primitive
manner, because it's not a competition between projects and principles but only
a quarrel, as I was saying earlier."

Economic analyst Adrian Mitroi explains the effects that political
tensions have on the economic environment:

"We've been used to living in a prosperous economic context that is
almost indifferent to what happens on the political scene. If this situation
continues, markets will keep on doing what they always do, simply and no
scruples. This mechanism of the financial markets is very tough and does not
take sides. It has a single way of operating, namely by increasing interest
rates and putting pressure on the exchange rate. The best solution, up to a
point, is the market itself, which has its economic stabilisers. The free
market economy we have at the moment, which we see as the best way to create
prosperity for all of us, is also equipped with adjustment instruments."

The figures are not worrying for the time being, says economic analyst
Adrian Mitroi:

"When the country is booming, as it's the case now, with a 7% economic
growth, it seems almost natural to have a 5% inflation rate, at least
temporarily. The inflation rate will probably settle at around 3%. If we take a
look at these figures they seem reasonable given the balancing act of an
economy that works above its potential. When things go smoothly, there are two
types of factors that can be brought into play: the Central Bank's monetary
policy, which tempers the economic exuberance and increases interest rates, or
the fiscal policy, which prevents salaries from going up and increases taxes.
Romania is quite a tax-friendly environment. We have a lower VAT tax and higher
salaries. It all piles up, though. If you think about it, we do have a small
inflation rate given the situation. So there's an accumulation of factors and
substantial economic growth. Romanian consumers are optimistic. They are
positive and save more than they did ten years ago. In my opinion, the most
important thing is the potential for investment. Productivity in the Romanian
economy is on the increase. The IT sector is highly productive and the farming
sector is also doing well. These are two exceptional engines for growth, which
depend a lot on the increase in productivity. So I believe we should not worry
too much yet."